Thursday, October 13, 2011
8:56:36 PM EDT

Googlicious

by
Jim Brown

Google's earnings beat after the close and resulting $40 after hours spike should kick the Nasdaq well over 2625 resistance at Friday's open.

Market Statistics

There is no recession at Google. The company earned +$9.72 per share or $2.7 billion for the quarter. Estimates $8.74 per share. That was a +26% gain from the year ago quarter. Gross revenue was $9.7 billion with net revenue after deducting for partner shares at $7.5 billion and +$200 million over estimates.

Analysts were expecting a slight slowdown in Google's growth on worries the lagging economy would cause advertisers to pull back on ad spending. Instead the Q3 revenue growth was +32% over the Q2 rate. CEO Larry Page said on the conference call it was a "gangbuster" quarter. Google added 2,600 employees in the quarter and +7,000 year to date. On the downside Google's operating expenses rose by +40% to $6.1 billion. Page said they had cut about 20 nonperforming products so far so employees can focus on what is working and reduce expenses. Page said Google Plus, announced in June, now has more than 40 million users compared to 800 million for Facebook.

Google Chart

JP Morgan (JPM) reported earnings that beat the street but the stock fell on the guidance. JPM reported earnings of $1.02 per share and estimates were 91-cents. Revenue was $24.4 billion compared to estimates of $23.4 billion. Several things dragged the stock price lower. JPM said investment banking revenue fell -31% to $1 billion because overseas customers were pulling back from deals because of the uncertainty about the debt crisis and the stability of the European banks.

They also said the increased regulations of Dodd-Frank and other new rules would add more than $500 million to expenses. Because of the increasing regulation expenses JPM was going to cut several thousand additional employees and would rethink their prior plan to open an additional 2,000 branches. This is your government regulation at work. 2,000 new branches would have been billions in revenue for local economies and more than 10,000 new employees. Local branches are bricks and mortar and local jobs not Wall Street.

Morgan also said it would lose $300 million in income from debit card fees in Q4. That is because a new Federal rule that caps the amount banks can charge merchants for debit card usage at about 24 cents per transaction, down from 44-cents. The rule went into effect Oct 1st.

JPM Chart

Bank America announced a $5 per month service charge for cardholders to offset the loss of fees. Other banks followed suit with fees of their own. Lawmakers in congress immediately requested the Justice Dept begin an antitrust inquiry against these banks for defying the will of Congress and possibly conspiring to raise rates. The major banks told Congress when they were considering the bill they would have to raise rates on consumers to offset the costs of handling the debit cards. Personally I would rather the retailer pay the extra 20-cents instead of me paying $5 a month for each of the nine debit cards my wife and I have. Retailers are making a profit on each transaction and they can factor that into the cost of sales. Just another stupid regulation that costs taxpayers money.

Safeway (SWY) reported earnings of 38-cents that rose +15% and beat the street by 3-cents. Revenue rose +7% to $10.065 billion. Gross margins shrank from 28.14% to 27.0%. The stock spiked higher at the open but then declined after the CEO said sales volumes were down throughout the industry and wholesale prices were rising.

Safeway Chart

Rumors continue to swirl around Yahoo and a potential acquisition. Names surfacing on Thursday included KKR and Blackstone as firms possibly considering an offer. Those firms would be part of a consortium that would pool financing. Alibaba has also discussed a plan with Silver Lake and Russia's Digital Sky Technologies about a joint bid. Yahoo owns 40% of Alibaba. A third group includes Providenc Equity Partners and Former News Corp executire Peter Chernin. Yahoo sent a memo to employees saying the companies advisers have been fielding inquiries from "multiple parties."

Microsoft may also be involved in order to protect its interest in the Yahoo advertising partnership. Microsoft is rumored to be offering a financing arrangement to prospective buyers. Microsoft has the cash and can possibly leverage that cash into an even better partnership deal with the new owners. Microsoft and Yahoo have a 10-year agreement to outsource Yahoo's search business to Microsoft.

One thing for sure, if no offer emerges soon the stock is going to tank really hard. With all the vultures circling the carcass, should they leave that would suggest there was no meat left on the Yahoo bones.

Yahoo Chart

Triquint (TQNT) and Qualcomm (QCOM) were big winners after a tear-down of a new iPhone 4S revealed multiple chips from both companies. Triquint was the biggest percentage gainer but QCOM, SWKS and AVGO also gained as their parts were identified. The news powered the SOX to a +2% gain and helped push the Nasdaq into positive territory.

Apple reported that all the available inventory for preorders of the iPhone 4S had been sold. Carriers are now projecting delivery in terms of weeks instead of days. This is going to be a blockbuster quarter for Apple.

Triquint Semi Chart

After the bell Microchip Technologies (MCHP) warned for the quarter saying business did not pickup as expected. I guess that is the penalty for not having any chips in the iPhone. Earnings are now seen in the range of 45-47 cents, down from 52-cents in prior guidance. Revenue estimates are now $340.6 million, down from $362 million. The company last issued guidance on August 4th.

Microchip said, "We experienced incrementally stronger headwinds and saw no seasonal Christmas build, which in turn adversely impacted all of our product lines and sales channels." Shares of MCHP declined -2% in after hours but the announcement was late and we could see a bigger decline on Friday.

MCHP Chart

Also after the bell Fitch downgraded its outlook for European banks RBS, BCS, UBS and Lloyds Banking Group. The company said pending capital raises, downgrades to the value of sovereign debt held by these banks and worries over an economic slowdown in Europe was behind the guidance change. Downgrades or warnings of a pending downgrade were also made on SocGen, Deutsche Bank, BNP Paribas and Rabobank. On the U.S. side of the pond Fitch put Morgan Stanley and Goldman Sachs on credit watch negative.

Goldman Sachs and Morgan Stanley have mentioned they might drop their banking status in order to avoid the Dodd-Frank rules on trading for their own accounts but that was not a factor in the negative credit watch. Fitch believes the firms still have exposure to events in Europe.

European banks are starting to kick back against the potential tier 1 capital requirements expected to be announced soon. In order to deal with the potential fallout from a Greece default and/or significant haircut on existing debt, there is discussion about forcing banks to boost tier 1 capital from 5% to 9% and do it in a hurry. That would force capital raises and/or sales of assets and the major banks are rebelling. EU officials are now starting to talk about a 60-70% haircut on Greek debt. That would be very detrimental to banks but you can't say they did not see it coming. Most analysts have already been pricing in that much of a drop.

The news of the downgrades reversed the positive futures into a negative decline. This could help to defuse the positive sentiment from the Google earnings on Friday.

On the economic front the weekly Jobless Claims rose came in at 404,000. This was a drop of -1,000 from last week's upwardly revised number of 405,000. That was revised higher from 401,000. We should be encouraged there is no upward increase because eventually even a slowly growing economy will create more jobs. Still, the weekly claims need to be under 350,000 to show any improvement in hiring.

Jobless Claims

The Manufacturers Alliance Survey for Q3 was flat at 67% compared to 68% for Q2. This is further confirmation the economy did not collapse in Q3 but it also did not grow. New orders were flat at 79 but back orders declined slightly to 73 from 80. Since anything over 50 represents expansion this was a positive report but the market rarely pays attention to these broad brush reports covering an entire quarter. They get the same data in the monthly reports.

The International Trade Deficit was also flat for August. The headline number came in at -$45.6 billion, same as the previously reported July number, although July was revised slightly higher at -$44.4 billion. This report was also ignored.

Reports due out on Friday include Import & Export Prices, Retail Sales, Consumer Sentiment, Business Inventories and the Treasury Budget. Sentiment will be the most important.

The markets were very well behaved even though the JPM earnings sparked a sell off in the banking sector. The S&P rallied exactly to strong resistance at 1220 on Wednesday and failed exactly on that resistance. The high was exactly 1220.25. The Dow also stopped at 11,625.30 and right on resistance. It is always nice to see the indexes perform as expected.

The S&P declined to initial support at 1190 on Thursday and that represented a decent -20 point pullback and what should have been a decent dip to buy. After a +145 point rebound a -30 point dip is minor. If the positive earnings continue I believe we can expect the rebound to continue.

The headache for Friday is the opening of the G20 Finance Ministers meeting in Paris. While there are no specific headlines expected you can't get that many high ranking officials together without someone speaking out of turn as they try to get their five minutes of camera time. Hopefully they will talk about progress being made in resolving the debt crisis but I am not holding my breath.

I am hoping the Google earnings will push the Nasdaq over resistance at 2625 and drag the S&P and Dow higher for another test of their resistance. Apple is up +$5 in after hours so if the gains from GOOG/AAPL hold we should see a positive start to Friday's market.

If we do see some more profit taking I would watch SPX 1190 as a critical support level followed by 1180. I think it will take more than general news out of Europe to push us any lower because the bull is out of the barn. He may not have escaped the corral yet but a break over 1220 could mean a run to greener pastures.

S&P Chart

The Dow may have failed exactly at resistance but it did not retreat very far. The dip to 11,400 was exactly where it should have rested and that left it within striking distance of resistance if there is no negative news.

The Dow will struggle over the downgrade in the financials but that may be offset by the bullishness in the tech stocks. Unless there is a major news event on Friday the Dow is likely to not venture far from Thursday's close. There is a little event risk for the weekend and traders may be reluctant to establish new positions until Monday.

Dow Chart

The motive power for Friday should be the Nasdaq. The gains by Google and Apple tonight should push the Nasdaq over resistance at 2625 and could trigger significant short covering. The Nasdaq bounced off that resistance on both Wednesday and Thursday and that probably gave the sellers an opportunity to establish short positions since the resistance level was so easy to recognize.

A spike through that level at the open on Friday will likely see early selling as traders attempt to capitalize on what they might see as a temporary spike. If the spike does not fail it would stimulate additional short covering and hopefully establish a new trading range on the breakout.

Nasdaq Chart

I am neutral for Friday. I remain in buy the dip mode and I think Thursday was an ideal dip to buy. The bank downgrades after the close are the wildcard but the Google/Apple gains are the offsetting entries.

Because it is Friday and there is always weekend event risk I would not expect a big move higher. I would be perfectly happy for all the indexes to just close slightly over current resistance and set us up for a potential move on Monday if there are no negative weekend events.